Of course, the focus for treasury should always be on optimising the available cash for working capital and strategic purposes – especially when the company needs access to cash on a regular basis to fund expansion, as is the case at NewCold Advanced Cold Logistics in the Netherlands.
“The treasury mandate set out by the board sets the boundaries and this can be more aggressive, but not so much that it endangers business continuity,” says Richard Blokland, NewCold’s Corporate Treasurer. “When we have surplus cash available to invest externally, our favoured products include money market funds and bonds.”
According to Ole Matthiessen, Head of Cash Management at Deutsche Bank, treasury policy should operate independently of the interest rate environment.
“Nevertheless, the onset of inflation could result in treasurers exploring options such as considering a floating rate strategy or a strategy that increases tenor, but keeps the interest rate reset period to a short tenor,” he says. “Beyond this (and in particular when anticipating a potential change in rates) treasurers should consider the possibility to match the investment interest period against the borrowing interest period.”
In cases where treasurers struggle with the accuracy of their data within cash flow modelling and forecasting, it is prudent to ensure a credit facility is in place on an overnight or short term basis to ensure spikes or unexpected cash requirements can be managed without disrupting the overall liquidity strategy.
Implementing transformational practices such as in-house banks is another option for treasurers looking to ensure optimal levels of liquidity for day-to-day needs while thinking strategically about appropriate avenues for surpluses.
Established products like physical cash concentration and notional pooling introduce automation of cash movement where, when and in the currency needed, explains Lori Schwartz, Global Head of Liquidity Solutions, Account Services and Escrow at J.P. Morgan.
“Combined with digital-first solutions such as virtual accounts, treasuries can create efficiency in their inter-company models and optimise use of working capital,” she says. “When treasuries centralise it is possible to materially reduce cash on deposit accounts and consider alternate uses such as investing it in the business.”
Since the outbreak of the pandemic we have seen the emergence of ultra-short fixed income funds in the institutional space as part of the quest for yield. Corporate treasurers are also putting money into products including ETFs that invest in very short-dated debt such as treasury bills.
“Money market funds are still a hugely important element in the overnight funding toolkit for corporate treasurers, but it is safe to say that they are now being complemented with a range of other investment options that are giving treasurers a little more discretion and control over their cash management,” says George Maganas, Head of Liquidity & Segregation at BNY Mellon.
Lauren Oakes, Global Co-head of the liquidity solutions client business within Goldman Sachs Asset Management, agrees that treasurers do not (and should not) change their risk appetite for liquidity due to macro factors in isolation.
One area in which she has seen renewed interest from treasurers in light of the prolonged low/negative rate environment is balance sheet cash segmentation. Once the operational (or ‘primary’) cash requirements are accounted for in accessible deposits and short term money market funds, treasurers are exploring options for investing their strategic cash.
“The ultimate liquidity solution can include a range of strategies from ultra-short duration on the more conservative end to multi-asset class/longer duration strategies on the higher risk end of spectrum,” adds Oakes.
UniCredit advises clients to cluster company liquidity into three different levels: operational liquidity, buffer liquidity, and structural liquidity. It sees sight deposits (a bank deposit that can be withdrawn immediately without notice or penalty) as remaining the optimal solution for operational liquidity, which has a time horizon of only a few days.
Capital protection, positive yields and an acceptable issuer quality are now possible only with tenors which are longer than maturities consistent with the strategic and commercial plan of most corporates.
For this reason, UniCredit advises clients to manage their liquidity through either assets under management or assets under custody instruments observes Sergio Ravich Calafell, the bank’s Global Head of Corporate Treasury Sales.
“The former is a portfolio of mutual funds chosen to fit the client’s requirements in terms of time horizon, mark-to-market volatility, asset allocation, issuers rating and target yield,” he explains. “The latter is a portfolio of securities bought on primary and secondary markets with short tenor and a yield that is linked to the performance of a specific underlying or a basket of underlyings.”
Treasurers focused on return ‘of’ capital rather than return ‘on’ capital should focus on optimising existing structures according to Karen Ly, head of global liquidity specialists at Bank of America global transaction services.
“The strategies treasures could contemplate in this environment include using deposits to minimise bank fees and reducing operating risks and interest expense associated with overdrafts,” she says. “We recommend that treasurers centralise their liquidity positions on a daily basis where permitted by local regulations to minimise idle cash and allow them to pay down external debt to reduce interest charges.”
Ly also recommends defining sweep parameters that fund local operations and extracting surplus cash on a ‘just-in-time’ basis across entities, countries and currencies. “Dollar functional businesses should regularly review their repatriation strategies to capitalise on global reinvestment or redeployment opportunities,” she adds.